Brazil: Stalking Horse Bidders Under Court-Supervised Reorganization In Brazil

Due to the increased requests for Court-Supervised Reorganization, especially those involving multinational companies (OGX, OSX, Parmalat, etc.) there is an escalating search for new mechanisms that enable a more effective recovery of credits and reorganization of financially-distressed companies.

One of the frequently discussed and addressed elements in court-supervised reorganization plans is the so-called sale under Article 60.

Law no. 11101 of 2005 (Law on Corporate Reorganization and Bankruptcy - "LRF"), regulates the required conditions whereby the disposition of the debtor's assets will benefit from the purchaser not inheriting said debtor's debt and liabilities (including labor and tax liabilities); this benefit makes purchases of assets by potential investors more attractive.

As to disposition of assets, generally speaking, although the debtor is free to continue to manage and maintain its business, it loses the right to "dispose of, or encumber, items or rights from its permanent assets" (Art. 66), except in case of court authorization after hearing the creditors' committee, if convened. Such "ad-hoc" authorization is waived in case the assets are previously listed in the court-supervised reorganization plan.

For the disposition of assets not to result in the succession of the labor, tax and other liabilities of the debtor company, it must, in accordance with Article 60 of LRF, involve a set of assets and rights economically organized, such as a plant and its employees and clients, a business establishment, or a service provision office. The law identifies this type of business unit as an "Isolated Production Unit", or UPI, in the Portuguese Acronym.

Only the court-ordered sale of a UPI has the powers to rule out the succession effects, pursuant to Articles 60 and 141 of the LRF. The law establishes three methods for court-ordered dispositions: auction, sealed bids or a third type ("pregão"), which is a mix of the auction and the sealed bid ("mixed bid").

The disposition, under whichever method, must be based on the proposal with the highest value. However, it is important to stress that in case there are justified reasons and upon a well grounded request from the trustee or the Committee, the judge may authorize a court-ordered disposition different from those under Art. 142 of LRF (Art. 144).

Another noteworthy issue is the expectation that the judge will ratify any other type of asset realization, so long as it is approved by the general meeting of creditors (Art. 145).

The U.S., which has constantly modernized its regulation of the reorganization and bankruptcy, has developed an interesting mechanism concerning asset disposition: the Stalking Horse.

Stalking Horses are third parties which may or may not be creditors and which make a certain and proposal to acquire a certain asset from the debtor, thus establishing a floor price for proposals to purchase that asset in a bid-like procedure. At this point, a Stalking Horse is given preference in the purchase of the asset, but potential purchasers may offer higher amounts than the one initially proposed by the Stalking Horse. In this event, the Stalking Horse may either outbid the offer or give up the purchase of the asset. "Theoretically, a "Stalking Horse Deal" is an attempt by the debtor to test the market prior to an auction or reverse auction. The intent is to maximize the value of its assets as part of (or before) a court auction in case of bankruptcy." The debtor may offer bidding protections, such as breakup fees for its best bidder prior to the auction or reverse auction. These incentives increase the value of the offering for the bidder, which may lead to a better offer before the auction begins. This higher bid then becomes the starting bid for the auction.

A Stalking Horse interested in the purchase of assets in a Brazilian Court-Supervised Reorganization is not only beneficial to the debtor, which will have a certain and undisputable proposal to sell its assets, but, furthermore, does not prevent or hinder, in any way, other interested creditors from making bids, which supports the underlying general principle of a court-ordered sale, namely to assure the transparency and the best price.

Lastly, Article 144 grants the judge a considerable leeway to introduce changes in the types of court-ordered sales under Article 142, and a third party acting in a manner identical or similar to a Stalking Horse, which is transparent and benefits the best bid, does not violate the principles that inspired such article.

Furthermore, Article 142 clarifies the mixed-bid and thus created an unintentional parallel with the Stalking Horse institute, as it is precisely the submission of sealed bids for selection of the best bid that determines the floor price of the open outcry auction, provided that the highest bidder attends the auction and confirms its proposal.

The only difference from the auction under Article 142, which may be applicable in view of the provision in Article 144, not diverting, however, from the underlying principles that inspired Article 142, is the setting up of the floor price for the auction, as negotiated between the Stalking Horse and the debtor.

The participation of a strong Stalking Horse investor is very relevant in cases, where the object of the sale is surrounded by contractual complexities, such as those caused by a UPI in operation, or regulatory issues (regulated activities, public utility companies, sensitive and confidential technology, etc...). In these cases the preparation of a serious and structured proposal will only be possible upon a due diligence and preliminary negotiations conducted out of court. This is typically the function of the Stalking Horse. Usually, the Stalking Horse is a large investor, an investment bank or a strategic partner with a renowned technical and financial capability, therefore tracing a straighter path for the court-ordered sale itself.

The Stalking Horse may, depending on its interest in the purchase, fund the required studies and analyses needed to outline the due diligence and the proposal, and, in cases where debtor faces more severe financial distress, even offer a bridge loan until the court-ordered sale is made.

These amounts could even be provided for as part of the purchase price, either upon an offset in case the Stalking Horse wins the open auction, or upon a direct payment to the Stalking Horse, made by the winning purchaser, in case the Stalking Horse loses the bid.

In conclusion: as the core purpose of the Court-Supervised Reorganization is to promote the debtor's turnaround and, in regard to the disposition of assets, defend the highest bid (which would be ensured by the way the Stalking Horse operates) and the full participation of creditors and any interested third parties, we do not envisage any legal impediment to the disposition of UPIs without succession, involving the so-called "stalking horse deals", as such structures not only give more certainty to the UPI sale procedure, but are within the judge's discretionary powers, pursuant to Article 144 of the LRF.

The 'Stalking Horse' in a US Chapter 11 363 Sale From Financier Worldwide's May 2006 Edition

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions